Let’s Talk About Tax

Many 501(c)(3) organizations receive a property tax statement on a newly acquired property and ask: "As a 501(c)(3) organization, aren't we exempt from property tax?"

The answer (not atypically for a lawyer's initial response): It depends.

The fact is that 501(c)(3) organizations that are exempt from income tax are not necessarily exempt from property tax. Indeed, property owned by such organizations is presumed taxable unless the organization can prove that the property is entitled to exemption.

Depending on the type of organization, there are a number of potential property tax exemptions that could apply to a 501(c)(3) organization, such as exemptions for public schools, public hospitals, educational institutions, and religious organizations. One of the most common exemptions is the institution of purely public charity exemption, which is what this post focuses on.

Purely Public Charity Qualifications

To qualify as an institution of purely public charity, a 501(c)(3) organization must meet the statutory requirements of Minn. Stat. § 272.02, subd. 7. The statute instructs assessors to consider the following factors:

(1) whether the stated purpose of the undertaking is to be helpful to others without immediate expectation of material reward;
(2) whether the institution of public charity is supported by material donations, gifts, or government grants for services to the public in whole or in part;
(3) whether a material number of the recipients of the charity receive benefits or services at reduced or no cost, or whether the organization provides services to the public that alleviate burdens or responsibilities that would otherwise be borne by the government;
(4) whether the income received, including material gifts and donations, produces a profit to the charitable institution that is not distributed to private interests;
(5) whether the beneficiaries of the charity are restricted or unrestricted, and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives; and
(6) whether dividends, in form or substance, or assets upon dissolution, are not available to private interests.

An organization must satisfy each of the above factors (many factors are automatically satisfied by virtue of being a 501(c)(3) organization). Alternatively, instead of satisfying Factors (2), (3), or (5), an organization may instead provide reasonable justification for failing to satisfy such factor(s). It is the organization's burden to provide to the assessor the factual basis for that justification.

Applying for an Exemption

Most 501(c)(3) organizations seeking a property tax exemption as an institution of purely public charity must submit an exemption application to its local assessor's office by February 1 of the assessment year, and again every three years starting with the year 2022 (e.g., 2022, 2025, 2028, etc.). Exemption application forms can be obtained from the local assessor's office.

To achieve tax exemption, the application requires the 501(c)(3) organization to demonstrate that it is an institution of purely public charity because it meets the above factors. The burden is on the nonprofit to prove eligibility for the tax exemption. If an organization fails to prove all of the factors or provide reasonable justification for failing to do so (as described above), the organization will not be granted a tax exemption. It is also important to show that the organization uses the property for which exemption is sought in furtherance of its charitable purpose.

It is not uncommon for an assessor to deny exemption status to an organization which might theoretically satisfy all of the requirements of an institution of purely public charity but has failed to prove it. Assessors may request additional information when reviewing the application. If a 501(c)(3) organization is denied tax exempt status, the organization may appeal that determination to the Minnesota Tax Court by April 30th of the year the taxes are payable.

Bottom Line

Not all 501(c)(3) organizations are exempt for property tax purposes. A 501(c)(3) organization bears the burden of proving it qualifies for tax exemption, such as by proving it is "an institution of purely public charity." Organizations should take great care in completing the property tax exemption application because how an organization completes the form could impact whether the assessor grants tax exemption to a property. An organization can challenge an assessor's denial of property tax exemption by filing a property tax appeal with the Minnesota Tax Court.